Free tourist zone to be set up in Kobuleti (Georgia). A free tourist zone exempted from property and income taxes will be set up in Kobuleti, Ajara region soon. The government-initiated bill is going through accelerated parliamentary procedures so as to make the free tourist zone idea true as soon as possible.

Certain allowances will be determined for construction of the hotels within the pine-grove at the territory of Kobuleti municipality, the Black Sea resort of Georgia in Ajara region. The construction site in the pine-grove is by 140 meters away of the seaside and encompasses three land-spots with the total area of 11.3 thousand hectare. Three types of hotels are defined to be constructed there: 5, 6 and 7-story buildings including 42, 52 and 60 rooms respectively. 27-30 hotels are supposed to be constructed ultimately.

Businessmen, who will invest at least GEL1 million in hotel construction in Kobuleti and sustain the hotel profile during 15 years, will be exempted from the property and income taxes for the equal period. The construction sites will be handed to such investors for symbolic price as of GEL1. Government will ensure organization of the adequate infrastructure for the hotels and leisure complexes with the purpose of fostering development of the corresponding project. This is a pilot project and government is interested to approve it as soon as possible. Submission of investors’ applications started on September 15, 2010 however the draft law on Assistance of Kobuleti Free Tourist Zone Development that must regulate implementation of the pine-grove project is still under parliamentary procedures. Government asked the legislative body past week to approve the law in an accelerated way that means to get through all due procedures during one plenary session week.

The problem is that according to the governmental initiative entrepreneurs will be exempted from income and property taxes only if they manage to get through with construction works till August 1st, 2011. Application submission deadline is October 30, 2010 and the draft law is desirable to be approved by that time.

Acceptance of this law will not affect the income part of the state budget, the bill explanation note assures as far as companies participating in the project are not completely exempted from all taxes. Some state budget allocations are earmarked on development of gas, water and electricity infrastructure within the free tourist zone territory. Respective ministries will insure implementation of infrastructure works. No unforeseen financial liabilities are supposed to occur due to the free tourist zone project.

According to Giorgi Khuroshvili, the Parliamentary Secretary of the Government of Georgia, the questioned project was elaborated with the aim of fostering creation of the profitable conditions for the development of entrepreneurship and tourism in Georgia.

Kakha Okriashvili, the MP called on the Government to implement the similar projects in the other regions such as Borjomi, Kazbegi, Tusheti, Dmanisi and etc. Khuroshvili does not exclude that similar project will be deployed in other tourist venues as well if the pilot project in Kobuleti is successful. According to him, the upcoming project caused quite a big interest and the Government was addressed with much more proposals that expected.

As Levan Varshalomidze, Chairman of Ajara government, is reported saying by GHN news agency on October 8, 2010, 48 investors [8 out of the figure are foreign investors] appear interested to participate in hotel construction within Kobuleti pine-grove and financial and economic ministry of Ajara will start preparation of agreements starting October 11, 2010. 2 thousand rooms are supposed to be added to Kobuleti hotel infrastructure after completion of the government-initiated project and about 500 jobs will be created.

There are some fears however that construction timetables are somewhat unrealistic and it is impossible to complete construction works in nine months. And unsuccessful investors may face financial sanctions if they break timetables envisaged by contracts. It seems unreasonable to attract due investments when the project countdown is on while the law regulating the project is still under vision. Investors need firm guarantees that they will really enjoy profits out of the pine-grove hotel zone.

But the single proposal government offers in this case is that if investors fail to get through with the construction of hotels by the fixed deadline they can inform Georgian government beforehand and the project implementation period can be prolonged by 3 months. On the other hand MPs propose not to deprive the unsuccessful investors of the project implementation rights immediately [if they fail to meet deadlines] but give a warning first. According to Okriashvili winter in Kobuleti is quite rainy that can create setbacks to construction works even against the backdrop of the art-of-the-state technologies.

Khuroshvili elaborated at the sitting of the Sector Economy and Economic Policy on October 7, 2010 that government aims on successful implementation and fostering of the project and not on sanctions actually.

“I do not want to speak on non-implemented obligations in a strong tone for government hopes investors will honestly meet their obligations,” Khuroshvili said.

Nevertheless MPs decided to set up the scientific-advisory council under the Sector Economy and Economic Policy Committee. The council will discuss the reasonable terms for the implementation of the project. The project should supposedly be completed before August 1st, 2011.

Free tourist zones hand-in-hand with gambling business

To attract investors to Georgian free tourist zones, Government boosts gambling business there. Soon another free tourist zone exempted from property and income taxes will be deployed in Anaklia, Samegrelo region.

Anaklia, one of the most beautiful resorts of Georgian Black Sea littorals, is a potential Free Tourist Zone (FTZ) site. Shortly after the creation of free tourist zone in Kobuleti this November, Georgian government announced another tourist zone in Anaklia last week and appealed to the parliament to approve the initiative in an accelerated way. Georgian government does not rule out announcing of free tourist zones throughout Georgia if the two said projects become successful. Mestia, in Svaneti [Caucasian highland resort] is named as one of the potential free tourist zones.

Anaklia is supposed to enjoy similar taxation preferences as Kobuleti FTZ: Businessmen, who will invest at least GEL 1 million in hotel construction in Kobuleti/Anaklia and sustain the hotel profile during 15 years, will be exempted from the property and income taxes for the same period. The construction sites will be handed to such investors for the symbolic price of GEL 1. Government will ensure organization of the adequate infrastructure for the hotels and leisure complexes with the purpose of fostering development of corresponding projects.Contracts with investors concerned will be concluded by the end of January 2011, and construction works of hotels must be completed in 18 months.

The controversial issue is that according to the governmental initiative, entrepreneurs will enjoy the tax-exemption only if they manage to get through with construction works in Kobuleti and Anaklia till August of 2011 and 2012 respectively. On the other hand, government offers to investors who fail to save timetables to inform Georgian government beforehand and the project implementation period can be prolonged by 3 months. However, some experts still fear that these timetables can be a trap for the investors.

Levan Kalandadze, Director Executive of Georgian Association of Small and medium Business, likes the FTZ project in its essence but fears that it lacks a clear strategy and legal basis that may lead to the violation of investors’ rights ultimately.

“The preferences granted by the FTZ project remain on verbal level and are not built in any law as of yet. Who can guarantee that government does not change its mind? And why they fix that short construction deadlines for investors, where do we speed up, what’s all for? Uncertainty makes me alert, were I an investor I would never have invested under such unclear circumstances,” He said.

Davit Narmania, Executive Director of the Institute of Caucasus Economic and Social Research, thinks that Georgian FTZ investments are long-term projects as they cannot be paid-back in short period.

“Georgia is a small market and cannot compete with neighboring huge Turkish market by price and service, therefore hotels built in Kobuleti and Anaklia can bring profit not earlier than 3-5 years. They will be profitable but only in long-term prospect,” he elaborated.

However to rival with the neighboring tourist market Georgian government decided via boosting gambling business. According to the recent amendment made to the law on Licenses and Permission Tolls, gambling business operated with the newly constructed hotels [accommodating at least 100 rooms] is exempted from tolls imposed on gambling permission for 10 years. The amendment covers only hotels constructed in Ajara seaside including Batumi, Kobuleti and Khelvachauri districts, as well as Anaklia in Samegrelo.

The point is that gambling business is prohibited in neighboring Russia, Azerbaijan, Armenia and Turkey. And according to Narmania, government uses its regional advantage quite dexterously to attract tourist to Georgia.

Georgia’s Mestia also to be declared free tourist zone. The final decision hasn’t been made yet, though the idea is being discussed in Georgia’s government .

On Sector Economy Parliamentary Committee session today MPs asked Georgian Deputy Finance Minister Natia Mikeladze whether the Ministry had this Mestia-related information. Mikeladze presented legal initiatives concerning Kobuleti free tourist zone on the sitting. She stated that Kobuleti and anaklia are on the agenda and she can make no comments about Mestia so far.

According to Mikeladze, a draft law imposing the same tax regime in Anaklia as in Kobuleti has already entered Georgia’s Parliament. Consequently, the initiatives stipulating adjustments to Tax Code will be further unified and adopted. Kobuleti and Anaklia free tourist zone initiatives have been suggested by the President Saakashvili.